Alter Ego Trusts, an Estate Planning Strategy for Seniors

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The alter ego trust was introduced in the Income Tax Act in 2000. It is the equivalent of the Joint Spousal and Common-law Partner Trust, but for single adults. he strategy behind this new type of trust is to enhance estate planning opportunities for seniors.

Advantages of the alter ego trust include:

  • avoidance of estate administration tax on assets held in the trust by the settlor (person who creates the trust);
  • privacy and non-public disclosure of settlor's assets (a will becomes publicly available when validated by the court);
  • trustees to manage the assets should the settlor become mentally incapable without the need for a separate power of attorney;
  • creditor protection since ownership of the asset is transferred to the trustee (but the purpose of the trust cannot be to defeat creditors);
  • lower litigation risk compared to a will since intervivos trusts (which means it is created during the settlor's lifetime) are less easy to challenge; and
  • unlike other trusts,
  1. the alter ego trust is not subject to the 21-year deemed disposition rule and is instead deemed to be disposed on the death of the settlor (this can be adv antageous because tax on the accrued gain on the underly ing assets of the trust is deferred until the death of the original settlor),
  2. there is a tax deferred rollover of assets from the settlor taxpayer to the trust and the resulting capital gain or loss is taxed in the trust upon the death of the settlor.

Due to Ontario having one of the highest estate administration taxes in North America (ie, 1.5% on the majority of your probated estate), the use of trusts and dual wills are popular estate planning tools to gift more to your loved ones.

In order to create an alter ego trust:

  • the settlor must be at least 65 years of age, and resident in Canada;
  • the settlor has to be able to receive all of the income of the trust that arises before his or her death and no one except the settlor may, before his or her death, receive or obtain the use of any income or capital of the trust;
  • the trust does not make an election regarding deemed disposition subparagraph 104 (4 )(a)(ii.l) of the Income Tax Act.

It should be noted that an inter vivos trusts, such as alter ego trusts, are subject to income tax at the top marginal tax rate. When transferring assets to trustees, the settlor loses control over them and it may be prudent to appoint him/herself as one of the trustee to retain some control. On the death of the settlor, there’s a deemed disposition of the assets that are in the trust and capital gains taxes cannot be set against the settlor’s capital losses or capital losses in the trust can’t be set against the settlor’s capital gains.

Landmark Law Professional Corporation may assist in the preparation of your trusts and Estate planning matters.

Disclaimer: This article does not contain legal advice and only provides general information. It is not intended to replace advice from a qualified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this article before making decisions. Use of this article does not establish a lawyer-client relationship.

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Winnie J Luk, BA, JD, MBA, founder of Landmark Law, is a seasoned Ontario lawyer practicing in Wills and Estates, Real Estate, and Business Law and frequent speaker of free legal education seminar.